Apple

HBO might soon be selling the old exploits of Tony Soprano on iTunes.

(Credit: HBO)

Apple may be getting ready to announce a content deal that would put old episodes of The Sopranos on iTunes.

Citing HBO insiders, Portfolio reported on Monday that Apple and HBO are getting ready to announce a partnership deal within the next two weeks (coinciding with the release of the Sex in the City movie?) that would supposedly involve Apple breaking its pledge to have the same pricing structure for all content sold on iTunes.

The report doesn't specify exactly how much Apple would charge for old episodes of HBO shows, but it notes that HBO insiders think that the deal is the "first time that Apple has agreed to a separate price structure for a content provider."

Adding HBO's content would be another feather in Apple TV's cap, after Apple turned the box into a movie rental service in January. The company has yet to deliver the 1,000 movies that were supposed to be available for rental in February; just fewer than 800 titles are currently available in the "All Rentals" section of the iTunes Store.

But the real impact of the deal could mean that Apple is finally ready to introduce variable pricing on the iTunes Store, after years of insisting otherwise. The Conde Nast publication notes that NBC's very public spat with Apple was over just that subject.

This has been quite a year for Apple, but Steve Jobs' magic wand doesn't always work.

In March, Apple unveiled Apple TV, the company's attempt at tackling a question that has eluded the PC industry for years: how can we get people to watch content delivered over the Internet in their living rooms on their big-screen TVs? When he announced the product last September, Jobs said that Apple TV "completes the story" of Apple's bid to reinvent the way people watch movies and television shows.

(Credit: CNET Networks)

Now, as we head into the holiday shopping season, it doesn't seem that all that many people are interested in products like Apple TV. Apple has been a pretty good judge of consumer taste of late, but few companies get a hit every time they step up to the plate.

"That category of devices is so nonexistent," said Ross Rubin, an analyst with The NPD Group, which tracks almost every imaginable retail segment. "It hasn't really evolved to the point where we've been tracking it as a category."

As a result, it's difficult to get a sense of how many Apple TVs have been sold. Apple employees were given last week off for the Thanksgiving holiday, and company representatives were therefore unavailable to comment.

Apple doesn't report shipment totals for Apple TV like it does for Macs, iPods, and iPhones. Revenue from Apple TV is lumped in with a number of other segments on Apple's financial statements, and it's also recognized on a subscription basis over a period of two years. But it's clear that Apple TV is quite a bit lower on the company's priority list behind the Mac, iPod, and iPhone divisions: Jobs even called it a "hobby" during the D: All Things Digital conference.

To be fair, it's not like any company has figured out how to make this work. Despite a lot of talk, and some interesting new products, the Internet is still not the delivery vehicle for prime-time television shows and movies; that box is already in your living room, and it came along with your cable or satellite service. There's no need to have something that links your PC or Mac to your TV if you don't have very many movies or television shows on your PC or Mac.

And even if people are watching videos on their PCs, many aren't even aware that there are products that can do these kinds of things, according to Joyce Putscher, an analyst with In-Stat. Retailers aren't sure the products will sell, so they don't carry them or display them as prominently as other types of tech products.

"Video drives the television experience, and while the PC has become the hub for photos and music, they haven't become great storehouses of commercial video," Rubin said.

And a virgin Apple TV is designed to only get paid video from the iTunes Store or free video from YouTube. There are a lot of popular shows and movies on the iTunes Store, but there are also lots of other sources of video on the Internet. Apple TV doesn't come with a browser, and high-definition shows aren't offered at the iTunes Store. You can hack it to run Mac OS X, and therefore lots of other applications, but most people aren't going to do that.

There are signs, however, that the long-awaited promise of Internet-delivered movies and television shows is starting to come together as the networks experiment with delivering their shows through their own Web sites. If that takes off, a crippled Apple TV is going to prevent owners from watching a wealth of free content that's becoming available on the Internet.

"There is one key recent development that would affect Apple TV and products that will try to compete, the quick and expanded move for studios to make their content available for free as long as you look at the ad," said Chris Crotty, an analyst with iSuppli. "But there's no (easy) way to view this ad-supported content on the television, which is ironic considering where it originates."

It will be interesting to see what Apple cares about more if networks actually pull off what they are promising to do with their own distribution vehicles: Apple TV or iTunes? If people show they want to download or stream videos from the networks or other sites like Amazon.com's Unbox or (shameless plug) CNET TV, they'll want a way to display that on the big screen.

Assuming that all comes to fruition, Apple could be missing a significant hardware opportunity if it decides it wants to protect the iTunes Store franchise at the expense of an Internet-capable Apple TV. Of course, if it were to give Apple TV owners the option of accessing free content, we'll find out if people want to pay to own ad-free content as Jobs maintains or endure ads to avoid paying a couple of bucks for something they'll never watch again, which could hurt iTunes sales.

Still, Crotty made an interesting point on that score. "Do the math: there's 6 minutes of commercials (on a 30-minute show), if you value your time at 20 an hour, there's your $2," Crotty said.

Until this new model shakes out, cable and satellite companies remain in firm control of the living room. But that doesn't necessarily mean Apple TV can't be a success in its current form; it's not going to replace a set-top box anytime soon, but could it replace a DVD player?

That was the company's emphasis for Apple TV in its early days, with the iTunes Store as the Blockbuster or Netflix equivalent. "It makes more sense to do online distribution of content than it does to be pressing media onto shiny plastic discs, and packaging them up and putting cardboard around that," Crotty said.

The issue here, though, is that the rental/subscription model for movies and TV shows is very much entrenched in the consumer's mind. Apple has strongly resisted a subscription model for the iTunes Store to this point, and Jobs has said on several occasions that he doesn't think people are interested in that type of service. Of course, right up until the company released its first video iPod player, he also said for years that people weren't interested in watching video on iPods. Now the entire iPod lineup (sans the Shuffle) is designed with video in mind.

In June, the The Financial Times reported that Apple was considering an online rental service, and Apple bloggers were recently excited at the discovery of code in the latest version of iTunes that hinted at such a service. So the same pattern may be at work here.

With Apple TV, Apple fulfilled its usual goal of coming up with something sleek and quiet that people wouldn't necessarily mind putting in their living rooms, and the device seems relatively easy to set up and use.

But it doesn't come even close to fulfilling the promise of Internet-delivered video: the ability to watch anything I want, whenever I want it, without having to pay for all the useless channels I never watch. Nothing does yet, unfortunately, so I make do with the 250-plus channels I now get plus my digital video recorder.

If you want to disrupt an industry, you have to come up with something significantly different, or something that delivers an experience that wasn't possible before. Apple TV doesn't do that, and until it does, it will still be a hobby.

I will say this: NBC's Jeff Zucker has got serious stones.

According to a report in the venerable entertainment industry trade rag Variety, Zucker, president and CEO of NBC Universal, asked Apple for a cut of iPod revenue as part of the failed negotiations between the two companies over a contract extension for the right to sell NBC's shows on iTunes. (Thanks, Valleywag.) If that's true, wow.

A source familiar with NBC Universal's negotiations confirmed that the company asked for a slice of iPod revenue but only after Apple refused to budge on variable pricing.

NBC reportedly asked Apple for a cut of iPod revenue during their negotiations over putting shows on iTunes. Fox apparently didn't.

(Credit: CNET Networks)

"Apple sold millions of dollars worth of hardware off the back of our content and made a lot of money," Zucker reportedly told The New Yorker's Ken Auletta during a benefit for former football powerhouse Syracuse University. "They did not want to share in what they were making off the hardware or allow us to adjust pricing."

The content industry has long had a beef with Apple's fixed pricing structure on iTunes. They would prefer to charge more for newer hit shows and less for older programs, but Apple CEO Steve Jobs has been firm on the $1.99 pricing for television shows on iTunes. Now, NBC and Zucker certainly have the right to decide what they want to charge for their content. And it's very early days for online video sales, so you can see how negotiations might have broken down over the pricing.

But seriously, you guys asked Apple for a cut of iPod revenue? Justifying it by claiming that they are making tons of money off your content?

I'm not even sure where to begin. First off, in earlier comments reported by Variety Zucker said that NBC took in only $15 million in revenue through iTunes during the last year of its deal. I'm not exactly sure when that began or ended, but in 2006 NBC Universal did $16 billion in revenue, according to parent company General Electric's annual report. So even if you tripled the amount of money NBC was taking in from iTunes sales a year, that would have only amounted to 0.3 percent of NBC Universal's revenue for the year. By comparison, NBC Universal's theme park business did $100 million in revenue.

So it's not like Apple screwed NBC out of all this revenue they would have otherwise been earning, although the network will get a chance to prove otherwise with the pending launch of its Hulu project and its own NBC Direct site. But that's not really the point.

How much revenue does Sony give NBC when it sells a television? How about Panasonic? Or Sharp? The idea that NBC thought Apple would agree to give them a share of iPod revenue is either the funniest or the most horrifying thing I've ever heard come out of the mouth of an high-profile executive like Zucker.

NBC may or may not need iTunes to distribute its content, and it will be interesting to see if it can build an online distribution model on its own. But does Apple really need NBC's content? I'm sure Apple would like to sell hit shows like Heroes or My Name is Earl on iTunes, but I can't imagine there's a network show good enough on television to justify Apple giving anyone a share of revenue from its crown jewel.

You have to have leverage to demand revenue from a prospective partner, like Apple did with AT&T over the iPhone. And that worked: the iPhone is AT&T's top-selling model, and brought hundreds of thousands of new customers to the carrier. Is Bionic Woman really going to bring thousands of new customers to iTunes?

I would have given anything to have been a fly on the wall when Zucker or one of his lieutenants made that pitch to Apple. Apple immediately retaliated after talks broke down, announcing plans to pull NBC's shows from iTunes before the contract between the two companies ended. They're still offering several shows, perhaps a signal that not all is lost, but I'll promise to watch an entire season of The Singing Bee if Zucker gets a cut of iPod revenue from Apple.

By the way, if you're going to start selling your own shows online, shouldn't you try to get a cut of PC sales from Hewlett-Packard and Dell, while you're at it?

CNET News.com's Greg Sandoval contributed to this report.